Thursday, 31 July 2014

Sixteen months after the sensational arrest in Italy
of Finmeccanica chief executive, Giuseppe Orsi, on charges of bribing Indian
officials to facilitate the sale of twelve AW-101 VVIP helicopters to the
Indian Air Force (IAF), the Italian prosecutors who were investigating the case
have dropped charges against the Italian defence conglomerate.

Jolted by that arrest, India’s ministry of defence
(MoD) had unilaterally suspended the Euro 556 million (Rs 4,480 crore)
helicopter contract with Finmeccanica subsidiary, AgustaWestland. It was
formally terminated on New Year’s day.

Now, with the Italian probe closed, the MoD must rely
on an on-going investigation by the Central Bureau of Investigation (CBI) that
has shown little progress so far.

After the MoD handed over the case to the CBI, the
agency took just days to file a First Information Report (FIR) against former
IAF boss, Air Chief Marshal SP Tyagi, and 12 others, alleging cheating and
criminal conspiracy. The accused denied all charges against them.

Since that initial FIR in Mar 2013, the CBI has filed
no further reports or even a chargesheet. The CBI has interviewed Tyagi once,
as well as three former civil servants who later became state governors ---
former national security advisor, MK Narayanan; former Special Protection Group
(SPG) chief, BV Wanchoo; and former Intelligence Bureau chief, ESL Narasimhan.

The CBI is determined to pursue its investigation, though
it has relied heavily on investigations by Italian prosecutors. “It is a
complicated case; but our investigations are at an advanced stage”, insists CBI
spokesperson, Kanchan Prasad.

Off-the-record, MoD officials claim “clear evidence”
that AgustaWestland violated an “integrity clause” in the contract, which
prohibits the employment of middlemen or agents to facilitate the deal. The
Italian investigation centred on three alleged middlemen --- Guido Haschke;
Christian Michel and Carlo Gerosa --- who allegedly bribed key Indian
decision-makers.

The latest developments were promulgated on the
Finmeccanica website on Tuesday evening, which stated: “Finmeccanica announces that the Italian Prosecutor has discontinued
investigations relating to the contract for 12 AW101 VVIP helicopters signed
with the Indian Ministry of Defence in 2010.”

The statement admitted that Finmeccanica
would pay a “negligible fine”, but this was “not in any way an admission of any
wrongdoing or liability” by the company.

As part of the arrangement, says
Finmeccanica, “The (Italian) Prosecutor specifically acknowledged the
non-involvement of Finmeccanica in the alleged wrongdoing, recognizing that
that since 2003, Finmeccanica has implemented – and regularly updated – an organizational,
management and audit model, sufficient to prevent unlawful conduct, whilst
ensuring that significant attention is given to compliance processes in order
to uphold the adequate standards of ethics and appropriate conduct.”

Since the contract was suspended, the
MoD and AgustaWestland have remained in a standoff, with three VVIP helicopters
having already been delivered to India, and several more ready for delivery.
The MoD has encashed bank guarantees worth about Rs 2,200 crore that had been
provided by AgustaWestland.

Yet, the Italian helicopter giant has signalled
that it would confront India’s MoD legally to protect its reputation. On Oct 4, 2013, AgustaWestland invoked
arbitration under the Indian Arbitration and Conciliation Act, 1996. The MoD stated
on Nov 26 that it would not accept arbitration, but then nominated an
arbitrator on Jan 1, when it terminated the contract. A third, neutral,
arbitrator must be appointed by mutual consent.

At the heart of the allegations against AgustaWestland
was a change in specifications that allowed the AW-101 to be eligible for purchase.
The IAF’s first tender (in 2002) demanded a helicopter that could operate at
altitudes of up to 6000 metres. After just one helicopter qualified (the EC-225
Eurocopter) the National Democratic Alliance (NDA) government began a
process of reconsideration in Nov 2003 that eventually led to another tender in
Sept 2006, which diluted the requirement to 4500 metres.

A MoD fact sheet, issued on Feb 15, 2013, points out
that the decision involved both the NDA and the UPA governments, and two IAF
chiefs --- including Air Chief Marshal S Krishnaswamy who preceded Tyagi.

The fact sheet says: “The
procurement case was, thus, progressed in accordance with the established
procurement procedure in a transparent manner with all stages of procurement
being followed meticulously.”

It remains unclear then what violation the CBI
investigation seeks to unearth.

Saturday, 26 July 2014

The government walks a tightrope between inculcating military discipline
and physical fitness in the country’s youth, whilst also safeguarding against a
militarised society from where extremist groups can draw on disgruntled youngsters
with military training.

While the defence ministry expands the National Cadet Corps (NCC) from 1,500,000
students countrywide to 1,850,000, Defence Minister Arun Jaitley told
parliament on Friday that the government does not favour compulsory military
training.

He was responding to Karnataka Member of Parliament (MP), CS Putta Raju.
Several MPS have made similar proposals over the last five years. Three private
member bills have sought compulsory military training. This includes one from Adhir
Ranjan Chowdhury, minister of state for railways in the United Progressive
Alliance (UPA) government, and now Congress Party president in West Bengal.

Mr Jaitley rejected compulsory military training for four reasons. First,
it would violate India’s “democratic ethos”, where people are free to choose
their professions. He said, “The Constitution does not provide for compulsory
military training”.

Second, this might militarise India’s fragile society. In a
startling admission, Mr Jaitley declared: “With our socio-political and
economic conditions, (compulsory military training) is highly undesirable, lest
some of the unemployed youth trained in military skills join the ranks of the
undesirable elements.”

The government’s apprehension about its citizens contrasts with the United
States, where the Second Amendment to the Constitution protects the rights of
individuals to keep and carry arms. This is justified through citizens’ right
to self-defence, the right to resist oppression (including by the state), and
the civic duty to come to the defence of the state. Passed in 1791, this one-sentence
amendment states, “A well regulated Militia, being necessary to the security of
a free State, the right of the people to keep and bear Arms, shall not be
infringed.”

Jaitley’s third objection to compulsory military training is that, the armed
forces have “no problem in getting adequate numbers of volunteer recruits.”
Therefore, there was no need to provide military training across the board.

Last, the government’s reply noted that training youth across the
country would involve enormous expense and infrastructure creation. “The likely
benefits of imparting military training to all the youth will not be
commensurate with the expenditure involved in such an effort,” he said.

While compulsory military training carries ominous overtones, the
government has steadily expanded the NCC, which includes military and weapons
training. Last September, at an apex NCC council meeting, the UPA minister of
state for defence, Jitendra Singh, suggested “including aspects of the NCC
syllabus into the curriculum of all schools and colleges.”

The demand for NCC training is strong. Last September the defence
ministry stated that 4613 schools and 2764 colleges are on the waiting list for
NCC training, with some having applied 25 years ago. To meet that demand, the
NCC is upgrading 153 “minor units” to battalion strength. This would allow
training to be extended to some 3200 institutions on the waiting list, and increasing
the NCC’s strength to 18.5 lakhs.

Also
being explored is a “self-financing model”, in which out of turn sanction would
be provided to private schools willing to pay the full cost of NCC training.

Thursday, 24 July 2014

The Rs
2,29,000 crore that Finance Minister Arun Jaitley allocated for defence in the Bharatiya
Janata Party (BJP)-led government’s first budget on July 10, a mere 2 per cent
rise over the last government’s interim allocation in February, would have
disappointed those who were reading too literally the BJP’s manifesto and
nationalist rhetoric in the run up to the general election in May.

This would
also have disappointed the military, which was allocated just 80 per cent of
its projected requirement of Rs 2,85,202 crore.

The modest
allocation would suggest that the government anticipates a benign security
environment in the region, notwithstanding the United States and North Atlantic
Treaty Organisation troop drawdown in Afghanistan by end-2014.

Instead of placing
defence allocations on a trajectory towards 2.5-3 per cent of Gross Domestic
Product (GDP), which national security hard liners have argued for, Mr Jaitley
allocated just 1.78 per cent of GDP, only marginally higher than the interim
budget’s 52-year low of 1.74 per cent. This will amount to 12.75 per cent of the
central government spending this year.

In fact,
the defence spending actually amounts to 2.55 per cent of GDP if one takes into
account several expenditures that are not included in the defence budget, but
which most countries count as defence spending.

These
hidden expenditures includes (see Chart 1) Rs 3,639 crore allocated to the
defence ministry itself (Demand No 20); and Rs 51,000 crore earmarked for
defence pensions (Demand No 21). It includes Rs 8,737 allocated to the department
of atomic energy (Demand No 4), which develops, builds and stores India’s
nuclear weapons. It includes Rs 37,322 crore spent on border forces and
counter-insurgency forces like the Border Security Force, Indo-Tibet Border
Police, Assam Rifles and the Assam Rifles (Demand No 55). Finally, it includes
Rs 6,673 crore allocated to the Border Defence Management Board that builds
strategic roads for the military (Demand No 83).

Counting these
allocations, defence expenditure is actually Rs 3,36,371 crore, a full Rs
1,07,371 crore higher than the stated allocation. This amounts to 2.55 per cent
of GDP.

Of the
stated budget (see Chart 2), the army gets roughly half (49.5 per cent); the
air force almost a quarter (23 per cent); while the remaining quarter is shared
between the navy (16 per cent), the Defence R&D Organisation (DRDO), the
Ordnance Factory Board (OFB) and others.

The big
gainer this year is DRDO, which has seen funding rise from about 5 per cent to
6.5 per cent of the defence budget. Its capital budget has been raised by almost
60 per cent, to Rs 9,298 crore. This signals strong ministry support to
indigenisation projects under way, such as the Tejas Mark II fighter; the Arjun
Mark II tank; the Sagarika submarine launched ballistic missile (SLBM) and a
major new project to develop a 155 millimetre/52 calibre towed howitzer.

Worryingly
the modernisation budget (Rs 94,588 crore) remains significantly lower than the
revenue budget (Rs 1,34,412 crore), with a capital-to-revenue ratio of just
41:59. The army spends just 18 per cent of its budget on equipment. In
contrast, the navy and air force spend a healthy 61-62 per cent of their budget
on capital expenditure, i.e. new warships, aircraft, weapons and ammunition.

The army’s massive
manpower accounts for its high revenue spend, and this is set to grow. Defying
the global trend of army downsizing, two recently raised mountain divisions and
a planned mountain strike corps will raise the army’s numbers from 12 lakhs to
almost 13 lakhs.

The Parliamentary
Standing Committee on Defence figures reveal that the army’s equipment modernization
is steadily falling. In 2008-09, the army spent 27 paisa of each rupee on capital
expenditure. This fell to 24 paisa in 2009-10; 23 paisa in 2010-11; 20 paisa in
2012-13 and just 18 paisa in the last two years.

This army’s
payroll of Rs 65,808 crore this year (see Chart 3) will consume almost 60 per
cent of its entire budget, leaving just one-third that amount for new
equipment. This is so even after doubling the army’s capital allocation from Rs
10,749 crore last year to Rs 20,665 crore this year (see Chart 4). As the
cost-of-living index rises, so too will military salaries; the seventh pay
commission will raise them even higher.

Aircraft acquisitions are also lagging, due to the air
force’s dependence on expensive foreign purchases. Its capital budget is down
from Rs 36,017 crore in 2013-14 to Rs 31,818 crore this year. With most of this
pre-allocated for equipment bought in preceding years, little is left for buying
the Rafale fighter, which the defence ministry is negotiating with French
vendor, Dassault. With the Rafale’s contract value estimated at Rs 80-1,00,000
crore, the signing advance would be Rs 10-15,000 crore. Additional allocations
would be needed for the contract to be signed this year.

The navy’s
capital allocation has been raised from Rs 19,600 crore in 2013-14 to Rs
22,312 crore this year. A major capital procurement this year will be the Rs
45,000 crore contract for seven Project 17A stealth frigates that two public
sector shipyards will build --- Mazagon Dock Ltd, Mumbai; and Garden Reach
Shipbuilders and Engineers, Kolkata.

In his
budget speech, Mr Jaitley also announced that the FDI cap in defence would be
raised from 26 per cent to 49 per cent. While adding a reformist patina to an
otherwise unremarkable defence budget, this was really a policy announcement,
unconnected with defence allocations.